The High Court has handed down its judgment in IAA Vehicle Services Limited v HBC Limited [2024] EWHC 1 (Ch) and provided useful guidance on when a failure to pay a deposit in connection with the exercise of an option to purchase will not result in termination of the underlying contract for sale.
The facts
The tenant had three leases of commercial property with the same landlord. Each lease had an option permitting the tenant to purchase the freehold of the property. The aggregate purchase price amounted to £3.91 million, a figure set when the leases were entered into.
The tenant had to pay a 10% deposit by midnight on the same day as notifying the landlord of its intention to purchase the freeholds. The tenant did not do so, pointing to the landlord's failure to provide bank details for the payment. The tenant sought a Court order broadly requiring the landlord to complete the sale contracts. The landlord submitted that failure to pay the deposit amounted to a fundamental breach of contract pursuant to which the sale contracts had terminated.
The deposit was to be paid to the landlord's conveyancer. The tenant had not asked for the appropriate bank details either before or when serving the notices and the landlord had not volunteered this information. The tenant was always ready, able and willing to pay the deposits, but for the lack of bank details and denied in any event that the deposits were required to be paid by the date the option was exercised. The landlord submitted that the bank details should have been requested prior to the service of the notices.
The decision
Two key questions came to the fore:
1. When the obligation to pay the deposits arose; and
The High Court applied the established modern approach to contractual interpretation, which involves applying an objective and contextual test to interpret the meaning of the words used, to the option provisions in the lease. It found that the lease expressly provided that the sale contracts came into existence "upon the valid exercise of the option" by service of the option notice i.e. on the day the option was exercised. No objection was made as to the validity of the service of the notices.
The lease made clear that the deposit should be paid "no later than the date of the contract" and therefore plainly set out that the deposit should have been paid by midnight on the same day the options were exercised.
The Court further held that the onus was on the tenant to take the necessary preparatory steps to ensure that it was able to comply with its contractual obligations. In that respect, the tenant had sufficient opportunity to "get all its ducks laid out in a row" and enquire as to the correct bank details prior to the service of the option notices. It would not have been open to the landlord to argue the sale contract had terminated if it had been asked for the bank details in good time and refused to provide them.
2. Whether time was of the essence for payment of the deposits.
The sale contract could be terminated only if it had been fundamentally breached (a repudiatory breach, in legal terms). This would only be the case if time was 'of the essence' for payment of the deposit. A failure to pay a sum where time is of the essence results in an absolute loss of the right that is contingent on said payment. Time would be of the essence if payment of the deposit was a fundamental condition of the sale contract.
On the authority of Millichamp v Jones [1982] 1 WLR 1422, the determination of whether a deposit was a fundamental term is decided by reference to the document itself and the circumstances at the time it was entered into.
Samarenko v Dawn Hill House Ltd [2011] EWCA Civ 1445 determined that, ordinarily the requirement to pay a deposit and the timing of payment would be a condition of the contract i.e. time would be of the essence for payment. The question then fell to whether the set of facts in this case could be distinguished.
With hesitation, the Court determined that the case was outside the "ordinary run of cases". Timely payment of the deposit was not to be treated as a fundamental condition; time was not of the essence. Therefore, non-payment of the deposit was not a fundamental breach pursuant to which the contract should be treated as terminated.
The Court held that the options had been validly exercised and were binding on the landlord. The Court ordered specific performance and the landlord was required to complete the sale contracts.
The reasoning
The Court felt this case was outside the ordinary run of cases for two main reasons (which had a cumulative effect):
1. This case did not concern an ordinary contract for the sale and purchase of land, but rather an option in a lease for the tenant to purchase the landlord's reversionary interest.
The Court considered the pre-existing proprietary relationship between the parties. The leases would continue for the remainder of the term, plus any statutory term under the Landlord and Tenant Act 1954. This fettered the landlord's ability to freely dispose of the property irrespective of whether the option was exercised. This was to be contrasted with the position of a buyer and seller in an ordinary contract for sale where the failure to pay the deposit enables the seller to terminate the contract, so to be able to freely market the property again. In this case, the landlord could also rely on the ongoing rental payments as compensation for any loss.
The Court also considered that payment of a deposit in an ordinary contract for sale is indicative of a buyer's genuine commitment to the purchase. The Court distinguished that position in the context of this case and held it was reasonable to anticipate that the option would only be exercised if the value of the freehold had risen since the option price was fixed. This meant exercising the option was evidence enough that the tenant "clearly means business, irrespective of payment of the agreed deposit".
These considerations collectively pointed against time being of the essence for payment of the deposit and therefore any late payment leading to termination of the sale contract.
2. The true interpretation of the contractual provisions revealed that time should not be treated as being of the essence for payment of the deposits.
The leases incorporated terms that the deposit should be paid no later than the date the option was exercised but were silent about whether time was of the essence for payment. The leases did otherwise incorporate certain pre-conditions as to the valid exercise of the option but payment of the deposit on the date the option was exercised was not one of them.
The Court held it would have expected the lease to expressly state that payment of the deposit was a condition of the valid exercise of each option if that was the intention of the parties. Considered in conjunction with the above factors, the Court held this pointed against any requirement for the timely payment of the deposit needing to be treated as a fundamental condition of the contract.
Implications
Both landlords and tenants should be careful to spell out the conditions to be attached to the exercise of an option including the manner and timing of any payments. It is in the interests of both parties to achieve legal certainty to avoid the risks and costs of litigation.
Tenants should carefully check the terms and conditions associated with exercising an option and in good time before seeking to exercise it. Tenants would be well advised to take legal advice on this to ensure any ambiguity that may complicate the exercise is identified and a strategy can be formulated and implemented to mitigate against any complications.